You see what’s happening.
Every week it seems like the stock market hits historic highs, climbing endlessly upward.
But you’ve seen this before. You know that the market can’t keep rising forever. Surely, a crash is coming.
Inflation is becoming a noticeable issue. You see it when you fill up your car or when you’re shopping at the grocery store.
So, what is the best use of your cash during this unprecedented time? First, we need to get a true pulse on the market.
Determining the Health of the Economy
Classic metrics like these usually give us a good indication of where the economy is at.
- Consumer confidence is rising, with people coming off the Pandemic lifestyle having reason to believe things are better than they were a year ago.
- US Household debt to GDP is now inline with where it was about five years ago in June 2016, a relatively positive sign for the economy.
- According to the Federal Reserve, Credit card debt has seen an increase in the percentage of individuals who are 90 days late or more on their payments. This is an obvious bad sign for the economy.
- The Treasury yield curve currently looks healthy and doesn’t show signs of inverting. This metric demonstrates that if we were to buy treasuries, we should expect a higher interest rate over a 30 year loan than just a six month one.
- Jobless claims were around 200,000 new claims each week in the two years leading up to 2020. As of this writing, they sit just over 350,000 a week, the lowest level since the Pandemic struck last year. So while they are still a little higher than before, the metric is much lower than it was during the peak of the Pandemic.
- The unemployment rate is around 6%, which is higher than the 4% rate before the Pandemic. But considering the peak of around 15% that was reached in early 2020, this is an overall positive sign.
- Looking at the price of existing home sales, if you own a house, the value of it is going up. From May 2020 to May 2021, the median value of a home has increased almost 24%. As a homeowner, this is great news for you. However, for those wanting to buy a house, this means it is not the best market to buy into right now. That being said, the rate of houses being built is steadily increasing as we climb out of the Pandemic economy, allowing for a larger supply of homes for potential buyers.
- Inflation is a hot topic right now, so let’s evaluate that dynamic for a minute. There’s a strong relationship between the growth of the labor force and inflation trends. In the 1970s, when inflation was a huge problem in the U.S., the labor force grew 2.5% a year. This meant a lot of new people had money to spend. More recently though, between 2014-2019, the labor force grew by only about 1%. The population is also older, which generally correlates to less inflationary pressure. In other words, in a year or two from now when the supply chain across the economy catches up to the demand, inflation should settle back down.
Takeaways
Overall, these metrics show an economy that is relatively healthy and is slowly getting back to pre-pandemic shape. However, the stock market itself is overvalued, based on prices to earnings ratios, and is due for a correction. To determine if you should wait for that correction to take place in order to invest your money, let’s look at a unique way to gauge the current state of the market.
Looking at Past Drops in the Market
With many different ways to study the market and how best to engage with it in its current state, one investor took a fascinating approach in evaluating historical trends and what they could mean for today. YouTuber James Shack explained in one of his videos how waiting for a crash might be a waste of your time.
Shack analyzed the S&P 500 over the last 60 years to gauge on any given day what the chances were that it would drop 20%. For example, if it was trading at 5000 to start the day, what is the likelihood it would eventually drop to 4000.
He also did the same for when the markets reached all-time highs, such as the environment we’re in right now. Interestingly, the chances of the market eventually dropping 20% in either scenario are almost identical, with each hovering around a 40% chance. This means that despite the fact that the market is skyrocketing right now, and many believe a crash is imminent, the percentages say there’s as good a chance for a crash in today’s market as there was on any given trading day over the last 60 years.
Of course, this time could be different. Past metrics don’t guarantee future predictions, especially because of how quickly the market crashed at the start of the COVID-19 Pandemic and in turn how quickly it rebounded throughout 2020 to now.
However, if you’re looking to hold your money with this newfound knowledge, be warned that the fall to hit that 20% target typically occurred over a 25 month period for an average trading day, and a 34 month period during an all-time high period. So, if you’re sitting there trying to find the right time to buy low, you may be waiting quite a while.
Final Notes
So while it might seem like the right approach to wait for the market to crash before investing, you could be missing out on years of growth opportunity. Time in the market is better than timing the market. The best approach is likely to continue to dollar cost average and invest a certain amount every month while keeping some cash on hand to take advantage of undervalued securities if the market does trail downward.
You could also look into what Bill Gates is doing and buy up farmland. If you are someone without the buying power of billions of dollars however, you could look to invest in farming stocks such as Bunge Limited and Farmer Brother’s Company. After all, people will need food no matter how the overall market is performing.
What is your approach to investing in the current market climate? Let me know in the comments!